Microsoft Buying LinkedIn Is a Terrible Mistake

Microsoft (MSFT) has a reputation of making terrible M&A decisions. The acquisitions of Hotmail and Nokia were deemed as huge failures. Steve Balmer executed many terrible acquisitions during his tenure as the CEO. Microsoft certainly didn’t help its reputation when it announced yesterday that it was going to buy LinkedIn (LNKD) for over $26 billion.

Yes, Microsoft acquired LinkedIn in an all-cash deal worth over $26 billion, which was at a premium of about 50%.

In my opinion, Microsoft has grossly overpaid for LinkedIn and has made a terrible mistake in its quest for growth. While the news is great for LinkedIn shareholders, the deal will likely prove to be damaging for Microsoft investors.

Microsoft was probably desperate for growth. Microsoft’s sales have been flat and analysts were estimating the company to report a 2.2% decline in revenue. In the desperate quest for growth, it seems like Microsoft has overpaid for LinkedIn as the company is only projected to rake in about $3.7 billion in sales this year. Given that Microsoft itself generates over $90 billion in annual sales, the acquisition doesn’t seem to bring any value to the table.

LinkedIn will hardly kick start Microsoft’s growth and the 50% premium does seem excessive. Analysts are expecting LinkedIn’s revenue to grow by a little over 24% this year. Although the growth is impressive, the amount that Microsoft paid for it is not.

At $26 billion, LinkedIn should have been growing by at least 50% annually. Comparing the valuation of LinkedIn with peers like Facebook (FB) and Twitter (TWTR) paints a clear picture of the overvaluation.

Given Microsoft’s track record of mismanaging large acquisitions and the fact that LinkedIn’s growth prospects are nowhere close to its peers like Facebook, the acquisition seems to be a terrible move and will destroy shareholder value in the long-run. The only winners from this deal are LinkedIn shareholders.

Conclusion

Clearly, Microsoft has grossly overpaid for LinkedIn. Given that the company is only expected to grow about 24% this year and under 20% next year, the 50% premium on its valuation does not make any sense. The deal is a blessing for LinkedIn investors as it has provided the best exit point since the time when Linked crashed almost 50% due to its terrible quarterly results.

Microsoft has lived by its reputation of making terrible acquisitions and the LinkedIn deal may be the worst of the lot.